ETF Replay Portfolio Preview

The ETFReplay.com, Basic ETF, and US Sector Momentum Portfolios are set to update tomorrow night.  For a preview of what may be in store for the ETFReplay.com portfolio, check out either my Stocktwits and Twitter stream right now.

The portfolios will not be updated until after tomorrow’s (Wednesday) close so things could change in the next day…

A Review of “Jackass Investing”

Michael Dever’s Jackass Investing: Don’t do it. Profit from it. has surely raised some eyebrows and not just because of the aggressive title.  If the title makes you  uncomfortable, you will feel more uncomfortable after you read Dever’s bold challenge of 20 common investment myths. Dever took me out of my comfort zone as an investor and challenged many of my own assumptions. I finished the book as a better investor, armed with new insight on how to better create a portfolio with potential for greater return and lower risk.

Dever argues that investors need to understand both the baseline conditions and return drivers for investment and trading strategies. He encourages readers to rethink the baseline condition assumptions behind commonly held investment beliefs. For example, US stocks have been a great investment for over 100 years, but this does not necessarily mean they will continue to be a great investment if baseline conditions change in the United States.  Relying on historical repetition is not a sufficient investment thesis if baseline conditions change.

Jackass Investing exposes readers to the potential benefit of investments which have different “return drivers”.   These different return drivers act a a source of diversification and trading/investing strategies with different return drivers, not traditional asset classes, can act as true sources of diversification.  Dever is clearly not a fan of buy-and-hold investing primarily because it is not a sufficient source of diversification. Rather, Dever lays out in specific detail several actionable investing strategies with different return drivers and low correlations to popular asset classes. The need to diversify strategies and not just asset classes is also an argument I have made frequently on Scott’s Investments.

There is also an actionable portfolio on the official website for Jackass Investing. The portfolio is possible for an individual to implement but given the amount of positions and strategies, a reasonbly sized portfolio is necessary to implement all of the strategies.  However, it would not be difficult for an individual with a smaller portfolio to construct a custom portfolio using the recommendations in Jackass Investing.

Michael Dever is the founder of Brandywine Asset Management which trades portfolios in the global currency, interest rate, stock index, mets, energe and agricultural cash, futures and options markets. This rightfully gives him insight and bias towards managed futures strategies.  Jackass Investing encourages readers to invest in managed futures strategies, either directly with CTAs (Commodity Trading Advisor) or via mutual funds and ETFs that mimic managed futures strategies.  Currently the primary drawback is not in managed futures themselves – I believe they provide diversification benefits because of their low correlation to popular asset classes – but that ETF and mutual fund options are limited in the managed future space.  However, in the ever-evolving world of ETFs it is no doubt only a matter of time before more options become available.

Silver Poised to Move

This weekend I noted the interesting technical patterns forming in Silver and Natural Gas. Silver (SLV) remains a tightly wound spring after today’s relatively calm action. As the daily chart below shows SLV has technically closed above the trendline, a potentially bullish sign of a trend reversal.  However, given the close proximity to the trendline a more decisive move above last week’s high of $34.65 is needed before more bullishness is warranted. In addition, as a later chart will show, the silver futures market has yet to close above its trendline.

The chart from my earlier article also showed the fibonacci retracement levels from the April 2011 high to the December low.  SLV closed $.04 above the 38.2% retracement level today. The 38.2% level also coincides closely with a key resistance level (shown on the next chart):

The key resistance levels are shown below and they coincide with the gaps in September.  The first hurdle is a close above $34.50 and then the next price target is $37.94:

Chris Vermeulen analyzed the silver futures market today and noted “They [silver and gold miners] have yet to break through their key resistance levels. That being said it could happen an day now as they have both been flirting with that level for a couple trading sessions now.” His chart is below:

Silver futures drive the price of SLV, so the futures market is the most important to watch when analyzing the primary driver of SLV.

My Bottom line: SLV is close to an explosive breakout but first needs to close above $34.50-$34.65 before confirmation. Whether the next move is up or down, we should know  within hours or days.

Jeremy Grantham’s Quarterly Letter

The always insightful Jeremy Grantham of GMO recently released his 2011 fourth quarter letter. The letter is free to view but registration is required on GMO’s site.  I highly recommend it.

This quarter’s letter focuses on GMO’s investing themes for 2012 and there is also a dedicated section to the deficiencies of capitalism.  However, the letter opens with “investment advice from your Uncle Polonius”. I have put the 10 bullet points below, but for the full effect the letter is worth your time. Point 5 is encouraging for those of you managing or hoping to manage your own assets:

1. Believe in history.

2. “Neither a lender nor a borrower be.

3. Don’t put all of your treasure in one boat

4. Be patient and focus on the long term

5. Recognize your advantages over the professionals

6. Try to contain natural optimism.

7. But on rare occasions, try hard to be brave.

8. Resist the crowd: cherish numbers only.

9. In the end it’s quite simple. Really

10. “This above all: to thine own self be true.

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Silver and Natural Gas Charts

As much as I try to focus on anything but financial charts and technical analysis, I still find myself drawn to them in my spare time.

Below are a couple of charts I shared this morning on my Stocktwits stream and via twitter.

The Silver chart is posted on Chart.ly here, below is the image:

The Natural Gas chart is posted on Chart.ly here, below is the image:

My interpretation of both patterns is that a bigger move is on the way this week.

Silver futures clearly looks to be breaking out to the upside; however, a failure to break to a new high early in the week could mean further weakness.  It closed about the 38.2% retracement level of $35.13 on Friday and hit resistance at $35.75.  Thus, it is wedged tightly between  these two price levels and I do not expect that to last long.

Natural gas on the other hand could move either way but I expect action early in the week could dictate the next trend.  It is forming a symmetrical triangle pattern and the long term trend is clearly negative. However, price action in recent weeks has shown some strength so one interpretation is that the break above or below the triangle pattern drawn in the chart above will dictate the next big move.

Investment Articles

Below are some investment related articles I am reading this week. The primary reason I originally started this site was to organize bookmarks and interesting articles related to investing and economics.  I try to keep this tradition alive every week by sharing articles I am reading. Here is today’s list:

Understanding the Basic Language of Option Trading – JW Jones

 What Has Worked in Investing (pdf) – Tweedy, Browne Company

Media Headlines Will Lead You to Ruin – Lance Roberts

Ben Graham’s Curse on Gold (pdf) – John Mauldin

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U.S. long bonds: Buyer Beware! Prieur du Plessis

 Macro Tides: In the Garden of Europe – The Big Picture

There has never been a better time to be an individual investors – Abnormal Returns

What’s Greek for ‘No End in Sight’? Satyajit Das

S&P 500 Cheapest to Bonds on Zero Fed Rates – Bloomberg

 Unusual Drawdown Risk – John Hussman

New Features Added to Ivy Portfolios

I have added a new feature to the Ivy Portfolio spreadsheet provided on the top and right hand side of Scott’s Investments.  The percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10 month simple moving average is now provided.

Below is a screenshot:

I have also decided to add additional price signals based on unadjusted dividend/split data from Yahoo.  The difference is that the 10 month simple moving average for the data below is calculated using unadjusted historical price data.  Thus, you may see different signals from time to time and small differences in percentages above/below a moving average depending on whether an ETF has paid a dividend in the past 10 months.

I often get questions from people who are looking at a moving average on a charting system which does not exactly align with the signals listed on this site. In most cases the charting system is basing moving averages on unadjusted data.  Therefore, I have decided  to add these unadjusted signals in order to help users see any potential differences in signals based on the nature of the historical price data.

The data is provided on an as-is basis. It is up to users to determine how to use it and to always do your own research. However, regardless of whether you invest in your own “Ivy Portfolio” it is important to remain consistent in your approach.

Below is a screenshot:

The Short and Long-term Picture for Gold

Periodically on Scott’s Investments I analyze the technical picture for Gold and its corresponding ETF, GLD (SPDR Gold Shares ETF). Before I get to the technical picture, let’s look briefly at money supply and Gold’s long-term fundamentals.

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Gold can act as a hedge against quantitative easing  and currency debasement because it is viewed as an alternative to fiat currencies.  Looking at the chart below, courtesy of Chris Vermeulen via the St Louis Fed, we see the long-term expansion of M2 money supply is in a long-term uptrend:

A decline in a velocity of M2 money stock as shown below tells us in simple terms that the M2 money supply is not turning over as quickly as it was at its peak in the mid 90s:

Vermeulen argues regarding gold and silver (SLV) “the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market.”

I would tend to agree with the intermediate to long-term picture. Nothing goes up forever and it is important to remain flexible and open-minded as conditions change and new evidence presents itself. However I do not think the bull market in gold has run its course, especially with the Federal Reserve stating it will keep rates at low levels for the foreseeable future.

In the short-term we can use technical analysis to guide us. Gold and GLD struggled mightily in December  but rebounded in January.  With the strong sell-off in December Gold’s long-term uptrend looked to be in trouble, however the January rebound, albeit on lighter volume, staved off a complete breakdown.  This trend has continued in February, with GLD up 12.52% year-to-date.

I continue to monitor the upward channel in GLD that began in 2008. Of note is the brief breakout of the channel in 2011, which resulted in a strong sell-off the subsequent month, bringing GLD back within the channel. In December 2011 there was a serious threat of a breakout below the channel, but GLD regained its footing in January and has gravitated closer to the top of the channel this month:

Since 2009 the 10 month simple moving average (in blue) has closely aligned itself with the bottom of the channel.  GLD currently resides above the 10 month moving average, although the break below the 10 month SMA in December was the first significant break below the average since 2008.

In the short-term today’s move in GLD was noteworthy and we could be near a short-term breakout depending on Wednesday’s action. February’s high is $171.23 and GLD is touching the trendline (yellow line) that includes February’s high. We actually closed just above this line today (Tuesday), so tomorrow we could be set for a higher move this week if resistance at $171.23 is broken. The next price target would be the resistance level (red line) around $175. Price support (green) in the daily chart is in the $166.50 – $166.60 range:

No current position in GLD

Weekend Readings

Below are some investment and market related articles I am reading this weekend:

Less than meets the eye at Facebook – Barry Ritholtz

Simple Index Funds May Be Complicating the Markets – Jason Zweig

Fed Sloshing the Liquidity Pool – Tom McClellan

ECRI’s Controversial Recession Call: Fifth Consecutive Improvement in the Growth Index – Doug Short

A Long-term Look at Inflation – Doug Short

The Cancer of Debt and Deficits (pdf) – John Mauldin (interesting tax reform proposal worth reading in this article)

 This is Still the Most Glaring Anomaly in the Market – Money Game

 

Testing the Harry Browne Permanent Portfolio with Emerging Markets

In response to my Harry Browne Permanent ETF Portfolio article from last week, David Jackson of Seeking Alpha wondered if the portfolio had been tested with Emerging Markets ETFs as opposed to US equities. His theory is the Emerging Markets have added beta over US stocks and may perform better in the future due to higher expected GDP growth.

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I created a second Harry Browne Permanent ETF Portfolio in ETF Replay and then used their platform to test the results.  The portfolio consists of a 25% equal allocation to EEM (MSCI Emerging Markets Index Fund), TLT (iShares Barclays 20+ Year Treasury), SHY (iShares Barclays 1-3 Year Treasury Bond Fund), and GLD (SPDR Gold Trust).   This allocation is identical to the portfolio in my “original” Harry Browne portfolio with one exception: EEM has been substituted for SPY (SPDR S&P 500 ETF).

If an investor bought the Emerging Markets Permanent Portfolio on January 3rd, 2005 and held until February 17th, 2012, the total return was 128.4% (12.3% CAGR) and 12.7% volatility (all returns discussed exclude commissions, taxes, and slippage). The original Harry Browne Portfolio (SPY/SHY/TLT/GLD) would have returned 105.6% (10.7% CAGR) at 9.3% volatility:

The max drawdown on the Emerging Market Permanent portfolio was 26.15% versus 16.17% for the original version.  The increased volatility and drawdown of the Emerging Market version is not surprising since emerging market equities have traditionally had higher volatility than large cap US equities.

In my original article I also tested the 10 month moving average system popularized in recent years by Mebane Faber in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. When an ETF in the portfolio was below its 10 month moving average at month-end, the position was sold and held in “cash” (SHY was used as a substitute for cash). When it closed the month above its 10 month moving average, the ETF was purchased at the stated allocation.

To properly test the moving average system I had to begin the test at the beginning of 2006 since GLD did not have adequate trading history to generate a 10 month moving average in 2005.  In order to properly compare strategies (moving average vs. buy and hold) we first need to show the results for buying and holding the portfolios over the same time period of 2006-present (portfolio A is the Emerging Markets version, Portfolio B is the original):

We see that the Emerging Markets version had a total return of 90.5% (11.1% CAGR). .63 sharpe ration, and 12% volatility. The original version had a total return of 81.1% (10.2% CAGR), .73 sharpe ratio, and 9.2% volatility.

For the first 10 month moving average test we will revisit the original Harry Browne ETF Portfolio (SPY/SHY/TLT/GLD). When we test the 10 month moving average system we see is that the moving average system decreased volatility and returns while increasing the sharpe ratio:

Below are the annual performance statistics which include no down years (2012 is down year to date):

When we apply the 10 month moving average system to the Emerging Markets version(EEM/SHY/TLT/GLD), we see the same impact, a decrease in returns and volatility and an increase in the portfolios sharpe ratio:

The annual statistics include no losing years (2012 is down year to date):

The table below summarizes the returns of each strategy for comparison purposes:

 

Time Period 2006-present
Portfolio Strategy Total Return CAGR Volatility Sharpe Max draw down
“Original” Permanent Portfolio (SPY/SHY/TLT/GLD) Buy & Hold 81.10% 10.20% 9.20% 0.73 -15.85%
“Emerging Mkt” Permanent Portfolio (EEM/SHY/TLT/GLD) Buy & Hold 90.50% 11.10% 12.00% 0.63 -23.12%
“Original” Permanent Portfolio 10 month SMA 69.30% 9.00% 7.10% 0.79 -7.10%
“Emerging Mkt” Permanent Portfolio 10 month SMA 83.30% 10.40% 9.10% 0.75 -11.80%
SPY Buy & Hold 23.90% 3.60% 24.40% 0.12 -55.20%
SPY 10 month SMA 60.30% 8.00% 13.20% 0.38 -18.70%

There are some important caveats in these tests. The time period covered is relatively short by historical standards so it is difficult to draw significant conclusions.  The period tested includes 2008, a particularly volatile period for equities and fixed income securities. Commissions, taxes, and slippage (the price you would actually get filled at when placing a real order versus the historical data used for the tests) will impact results.